A Nightmare on Main Street as Funds Fail

Almost no mutual fund managers have been able to protect Americans from losses in the stock market.

BOSTON ( TheStreet) -- The mutual fund industry this year has been overrun by a stampede out of U.S. stocks and into safer alternatives, namely large-company and bond funds, much as in 2008 when the financial industry needed a bailout to survive.

Investors pulled $14.6 billion from U.S. equity mutual funds and put $102 billion into taxable bond funds through the end of July, said Ryan Leggio, a mutual fund analyst at Morningstar. The S&P 500 Index is down 6.6% so far in 2011 after two years of gains and a slight rebound last week. The benchmark for American equities lost 16% of its value between July 22 and Aug. 19, the most in four weeks since March 2009, which turned out to be the bottom of the most recent stock-market crash.

"It's been a flight to bonds and away from equities," Leggio said.

U.S. Treasuries, considered the safest investments in the world, have rallied, pushing down yields to a record low of 2.2% from 3.4% at the beginning of the year. So-called long bonds are the best-performing category, with a gain of 17%, followed by the inflation-protected bonds, at 9.1%.

In the volatile week that just ended, long-term mutual funds had estimated outflows of $772 million, according to the Investment Company Institute, a trade group. That's because of investors' concerns about the creaky global economy, outsized U.S. debt and the euro-zone's sovereign debt crisis.

Earlier this year, gold-mining fund managers had the hot hand, and then it was health-care funds, but now its rock-ribbed conservative investment choices that pay dividends and have a reliable, virtually impenetrable customer base.

"We've seen pressure on stocks due to macroeconomic concerns, so it's made it a challenge for any portfolio manager to gain ground," said Todd Rosenbluth, Standard & Poor's mutual fund industry analyst. "The ones that have done well have been in more defensive sectors, such as health care and utilities."

Particularly telling of the market's turn, only two U.S. stock funds are in positive territory in the past three months, the $13 million currency fund Midas Perpetual Portfolio ( MPERX), with a 3.1% gain, and the World Commodity Fund ( WCOMX), at 1.2%. The latter invests in natural resources and has assets of $1.4 million. The Cook & Bynum Fund ( COBYX) is dead even for the period.